Archive for the ‘Economic Capital’ category

RISKVIEWS believes that this may be the best top 10 list of posts in the history of this blog. Thanks to our readers whose clicks resulted in their selection.

Instructions for a 17 Step ORSA Process– Own Risk and Solvency Assessment is here for Canadian insurers, coming in 2015 for US and required in Europe for 2016. At least 10 other countries have also adopted ORSA and are moving towards full implementation. This post leads you to 17 other posts that give a detailed view of the various parts to a full ORSA process and report.

What kind of Stress Test? – Risk managers need to do a better job communicating what they are doing. Much communications about risk models and stress tests is fairly mechanical and technical. This post suggests some plain English terminology to describe the stress tests to non-technical audiences such as boards and top management.

ORSA ==> AC – ST > RCS– You will notice a recurring theme in 2014 – ORSA. That topic has taken up much of RISKVIEWS time in 2014 and will likely take up even more in 2015 and after as more and more companies undertake their first ORSA process and report. This post is a simple explanation of the question that ORSA is trying to answer that RISKVIEWS has used when explaining ORSA to a board of directors.

The History of Risk Management – Someone asked RISKVIEWS to do a speech on the history of ERM. This post and the associated new permanent page are the notes from writing that speech. Much more here than could fit into a 15 minute talk.

Hierarchy Principle of Risk Management– There are thousands of risks faced by an insurer that do not belong in their ERM program. That is because of the Hierarchy Principle. Many insurers who have followed someone’s urging that ALL risk need to be included in ERM belatedly find out that no one in top management wants to hear from them or to let them talk to the board. A good dose of the Hierarchy Principle will fix that, though it will take time. Bad first impressions are difficult to fix.

What CEO’s Think about Risk– A discussion of three different aspects of decision-making as practiced by top management of companies and the decision making processes that are taught to quants can make quants less effective when trying to explain their work and conclusions.

Decision Making Under Deep Uncertainty– Explores the concepts of Deep Uncertainty and Wicked Problems. Of interest if you have any risks that you find yourself unable to clearly understand or if you have any problems where all of the apparent solutions are strongly opposed by one group of stakeholders or another.

The Own Risk and Solvency Assessment (or Forward Looking Assessment of Own Risks based on ORSA principles) initially seems daunting. But the simple formula in the title of this post provides a guide to what is really going on.

The insurer needs to develop the capacity to project the financial and risk exposure statistics forward for several years under a range of specified conditions.

Included in the projection capacity is the ability to determine (a) the amount of capital required under their own risk capital standard and (b) the projected amount of capital available.

The insurer needs to select a range of Stress Tests that will be used for the projections.

If, under a projection based upon a Stress Test, the available capital exceeds the Risk Capital Standard, then that Stress Test is a pass. AC – ST >RCS

If, under a projection based upon a Stress Test, the available capital is less than the Risk Capital Standard, then that Stress Test is a fail and requires an explanation of intended management actions. AC – ST < RCS ==> MA

RISKVIEWS suggests that Stress Tests should be chosen so that the company can demonstrate that they can pass (AC – ST >RCS) the tests under a wide range of scenarios AND in addition, that one or several of the Stress Tests are severe enough to produce a fail (AC – ST < RCS ==> MA) condition so that they can demonstrate that management has conceptualized the actions that would be needed in extreme loss situations.

RISKVIEWS also guesses that an insurer that picks a low Risk Capital Standard and Normal Volatility Stress Tests will get push back from the regulators reviewing the ORSA.

RISKVIEWS also guesses that an insurer that picks a high Risk Capital Standard will fail some or all of the more severe Stress Tests.

Furthermore, RISKVIEWS predicts that many insurers will fail the real Future Worst Case Stress Tests. Only firms that hold themselves to a Robust Risk Capital Standard are likely to have sufficient capital to potentially maintain solvency. In RISKVIEWS opinion, these Future Worst Case Stress Tests are useful mainly as the starting point for a Reverse Stress Test process. In financial markets, we have experienced a real life worst case stress with the 2008 Financial Crisis and the following events. Imaging insurance worst case scenarios that are as adverse as those events seems useful to promoting insurer survival. Imagining events that are much worse than those – which is what is meant by the Future Worst Case Scenario idea – seems to be overkill. But, in fact, the history of adverse events in the recent past seems to indicate that each new major loss is at least twice the previous record.

A Reverse Stress Test is a process under which an insurer would determine the adverse scenario that drives the insurer to insolvency. Under the NAIC ORSA, Reverse Stress Tests are required, but it is not specified whether those tests should be based upon a condition of failing to meet the insurer’s own Risk Capital Standard or the regulators solvency standard. RISKVIEWS would recommend both types of tests be performed.

Like this:

Insurers in the US and Canada are required to state their own internal Risk Capital Standard in their ORSA Summary Report. From RISKVIEWS observations over the years of actual insurer actions, insurers have actually operated with four levels of Risk Capital Standards:

Secure – enough capital to satisfy sophisticated commercial buyers that you will pay claims in most situations

Robust – enough capital to maintain a Secure level of capital after a major loss

In many cases, this is not necessarily a clear conscious decision, but insurers do seem to pick one of those four levels and stick with it.

Insurers operating at the Solvency levels are usually in constant contact with their regulator. They are almost always very small insurers who are operating on the verge of regulatory takeover. They operate in markets where there is no concern on the part of their customers for the security of their insurer. Sometimes these insurers are government sponsored and are permitted to operate at this level for as long as they are able because the government is unwilling to provide enough capital and the company is not able to charge enough premiums to build up additional capital, possibly because of government restrictions to rates. This group of insurers is very small in most times. Any adverse experience will mean the end of the line for these companies.

Many insurers operate at the Viable level. These insurers are usually operating in one or several personal/individual insurance lines where their customers are not aware of or are not sensitive to security concerns. Most often these insurers write short term coverages such as health insurance, auto insurance or term insurance. These insurers can operate in this manner for decades or until they experience a major loss event. They do not have capital for such an event so their are three possible outcomes: insolvency and breakup of the company, continued operation at the Solvency level of capital with or without gradual recovery of capital to the Viable level.

The vast bulk of the insurance industry operates at the Secure level of capital. Companies with a Secure capital level are able to operate in commercial/group lines of business, reinsurance or the large amount individual products where there is a somewhat knowledgeable assessment of security as a part of the due diligence process of the insurance buyer. With capital generally at the level of a major loss plus the Viable capital level, these companies can usually withstand a major loss event on paper, but if their business model is dependent upon those products and niches where high security is required, a major loss will likely put them out of business because of a loss of confidence of their customer base. After a large loss, some insurers have been able to shift to operating with a Viable capital level and gradually rebuild their capital to regain the Secure position and re-engage with their original markets. But most commonly, a major loss causes these insurers to allow themselves to be acquired so that they can get value for the infrastructure that supports their high end business model.

A few insurers and reinsurers have the goal of retaining their ability to operate in their high end markets in the event of a major loss by targeting a Robust capital level. These insurers are holding capital that is at least as much as a major loss plus the Secure capital level. In some cases, these groups are the reinsurers who provide risk relief to other Robust insurers and to the more cautious insurers at the Secure level. Other firms in this groups include larger old mutual insurers who are under no market pressure to shed excess capital to improve Return on Capital. These firms are easily able to absorb moderate losses without significant damage to their level of security and can usually retain at least the Secure level of capital after a major loss event. If that major loss event is a systematic loss, they are able to retain their market leading position. However, if they sustain a major loss that is less broadly shared, they might end up losing their most security conscious customers. Risk management strategy for these firms should focus on avoiding such an idiosyncratic loss. However, higher profits are often hoped for from concentrated, unique (re)insurance deals which is usually the temptation that leads to these firms falling from grace.

One of the goals of Solvency II in Europe has been to outlaw operating an insurer at the Solvency or Viable levels of capital. This choice presents two problems:

It has led to the problem regarding the standard capital formula. As noted above, the Solvency level is where most insurers would choose to operate. Making this the regulatory minimum capital means that the standard formula must be near perfectly correct, a daunting task even without the political pressures on the project. Regulators tendency would be to make all approximations rounding up. That is likely to raise the cost of the lines of insurance that are most effected by the rounding.

It is likely to send many insurers into the arms of the regulators for resolution in the event of a significant systematic loss event. Since there is not ever going to be regulatory capacity to deal with resolution of a large fraction of the industry, nor is resolution likely to be needed (since many insurers have been operating in Europe just fine with a Viable level of capital for many years). It is therefore likely that the response to such an event will be to adjust the minimum capital requirement in one way or another, perhaps allowing several years for insurers to regain the “minimum” capital requirement. Such actions will undermine the degree to which insurers who operate in markets that have traditionally accepted a Viable capital level will take the capital requirement completely seriously.

It is RISKVIEWS impression that the Canadian regulatory minimum capital is closer to the Viable level. While the US RBC action level is at the Solvency level.

It is yet to be seen whether the US eventually raises the RBC requirement to the Viable level or if Canada raises its MCCSR to the Secure level because of pressure to comply with the European experiment.

If asked, RISKVIEWS would suggest that the US and Canada waits until (a) the Europeans actually implement Solvency II (which is not expected to be fully inforce for many years after initial implementation due to phase in rules) and (b) the European industry experiences a systematic loss event. RISKVIEWS is not likely to be asked, however.

It is RISKVIEWS prediction that the highly theoretical ideas that drive Solvency II will need major adjustment and that those adjustments will need to be made at that time when there is a major systematic loss event. So the ultimate nature of Solvency II will remain a complete mystery until then.

Insurers all hold capital as a cushion against losses. But how much capital is enough?

There are three criteria that management use to determine how much capital needs to be held:

Level of Risk

Regulatory Requirements

Market Expectations

In a perfect world, those three criteria would all be the same. But in this world, they are not. The answer to the “How Much Capital?” question gets a different answer from each of those criteria. And it varies for different risks, which is the most restrictive.

RISKVIEWS has always been of the opinion that management needs to juggle the three points of view so that the capital is adequate in total to meet all three, but they may well have an opinion about one or several risks that it has a much less lower level of risk and therefore lower need for capital than may be indicated by either the regulators or the market. That kind of view is a natural consequence of the fact that management has more expertise and insight into some of its risks than either outside view.

The WillisWire series on ERM practices continues with a discussion of Risk Capital.

Like this:

Risk models can be used primarily to answer two very important questions for an enterprise whose primary activity is the risk business.

How did we do?

What should we do?

The “how did we do” question looks backwards on the past, usually for 90 days or a full year. For answering that question properly for a firm in the risk business it is absolutely necessary to have information about the amount of risk that the firm is exposed to during that period.

The “what should we do” question looks forward on the future. The proper time period for looking forward is the same as the length of the shadow into the future of the decision. Most decisions that are important enough to be brought to the attention of top management or the board of a company in the risk business have a shadow that extends past one year.

That means that the standard capital model with its one year time frame should NOT be the basis for making WHAT SHOULD WE DO? decisions. That is, unless you plan on selling the company at the end of the year.

Let’s think about it just a little bit.

Suppose the decision is to buy a laptop computer for the business use of one of the employees of an insurer. You can use two streams of analysis for that decision. You can assume that the only use of that computer is what utility that can be had from the computer during the calendar year of purchase and then you plan to sell the computer, along with the rest of the company, at the end of the calendar year. The computer is valued at the end of the year at a fair market value. Or you can project forward, the utility that you will get from that employee having a computer over its useful life, perhaps three years.

The first calculation is useful. It tells us “HOW DID WE DO?” at the end of the calendar year. But it not a sensible basis to make the decision about whether to buy the computer or not. The reason for that is not because there is anything wrong with the calendar year calculation. In theory, you could even run your company by deciding at the end of each calendar year, whether you wanted to continue running the company or not. And then if you decide to continue, you then must decide whether to sell every laptop or not, and similarly to sell every part of your business or not.

Most companies will automatically make the decision to continue, will not consider selling every part of their company, even if they have gone through the trouble of doing a “for sale” valuation of everything. That approach fits better with Herbert Simon’s “Satisficing” idea than with the theory of maximizing value of the enterprise.

But from a less theoretical point of view, putting absolutely everything on the table for a decision could be very time consuming. So what most companies is to imagine a set of conditions for the future when a decision is made and then as the future unfolds, it it does not deviate significantly from those assumptions, decisions are not reopened. But unfortunately, at many companies, this process is not an explicit conscious process. It is more vague and ad hoc.

Moving away from laptops to risk. For a risk decision, first notice that almost all risk decisions made by insurers will have an effect for multiple years. But decision makers will often look forward one year at financial statement impact. They look forward one year at a projection of the answer to the “How DID WE DO? question. This will only produce a full indication of the merit of a proposal if the forward looking parts of the statement are set to reflect the full future of the activity.

The idea of using fair value for liabilities is one attempt to put the liability values on a basis that can be used for both the “How did we do?” and the “What should we do?” decisions.

But it is unclear whether there is an equivalent adjustment that can be made to the risk capital. To answer “How did we do?” the risk capital needed has been defined to be the capital needed right now. But to determine “What should we do?”, the capital effect that is needed is the effect over the entire future. There is a current year cost of capital effect that is easily calculated.

But there is also the effect of the future capital that will be tied up because of the actions taken today.

The argument is made that by using the right current year values, the decisions can really be looked at as a series of one year decisions. But that fails to be accurate for at least two reasons:

Friction in selling or closing out of a long term position. The values posted, even though they are called fair value rarely reflect the true value less transaction costs that could be received or would need to be paid to close out of a position. It is another one of those theoretical fictions like a frictionless surface. Such values might be a good starting point for negotiating a sale, but anyone who has ever been involved in an actual transaction knows that the actual closing price is usually different. Even the values recorded for liquid assets like common equity are not really the amounts that can be achieved at sale tomorrow for anyone’s actual holdings. If the risk that you want to shed is traded like stocks AND your position is not material to the amounts normally traded, then you might get more or less than the recorded fair value. However, most risk positions that are of concern are not traded in a liquid market and in fact are usually totally one of a kind risks that are expensive to evaluate. A potential counterparty will seek through a hearty negotiation process to find your walk away price and try to get just a litle bit more than that.

Capital Availability – the series of one year decisions idea also depends on the assumption that capital will always be available in the future at the same cost as it is currently. That is not always the case. In late 2008 and 2009, capital was scarce or not available. Companies who made commitments that required future capital funding were really scrambling. Many ended up needing to change their commitments and others who could not had to enter into unfavorable deals to raise the capital that they needed, sometimes needing to take on new partners on terms that were tilted against their existing owners. In other time, cheap capital suddenly becomes dear. That happened when letters of credit that had been used to fulfill offshore reinsurer collateral requirements suddenly counted when determining bank capital which resulted in a 300% increase in cost.

RISKVIEWS says that the one year decision model is also just a bad idea because it makes no sense for a business that does only multi year transactions to pretend that they are in a one year business. It is a part of the general thrust in financial reporting and risk management to try to treat everything like a bank trading desk. And also part of a movement led by CFOs of the largest international insurers to seek to only have one set of numbers used for all financial decision-making. The trading desk approach gave a theoretical basis for a one set of numbers financial statement. However, like much of financial economics, the theory ignores a number of major practicalities. That is, it doesn’t work in the real world at all times.

So RISKVIEWS proposes that the solution is to acknowledge that the two decisions require different information.

Like this:

In 1952, Harry Markowitz wrote the article “Portfolio Selection” which became the seed for the theory called Modern Portfolio Theory. Modern Portfolio Theory (MPT) promises a path to follow to achieve the maximum return for a given level of risk for an investment portfolio.

It is not clear who first thought to apply the MPT ideas to a portfolio of risks in an insurer. In 1974, Gustav Hamilton of Sweden’s Statsforetag proposed the “risk management circle” to describe the interaction of all elements in the risk management process, including assessment, control, financing and communication. In 1979, Randell Brubaker wrote about “Profit Maximization for a multi line Property/Liability Company.” Since then, the idea of risk and reward optimization has become to many the actual definition of ERM.

Standard & Poor’s calls the process “Strategic Risk Management”.

“Strategic Risk Management is the Standard & Poor’s term for the part of ERM that focuses on both the risks and returns of the entire firm. Although other aspects of ERM mainly focus on limiting downside, SRM is the process that will produce the upside, which is where the real value added of ERM lies.“

The Risk Portfolio Management process is nothing more or less than looking at the expected reward and loss potential for each major profit making activity of an insurer and applying the Modern Portfolio Management ideas of portfolio optimization to that risk and reward information.

At the strategic level, insurers will leverage the risk and reward knowledge that comes from their years of experience in the insurance markets as well as from their enterprise risk management (ERM) systems to find the risks where their company’s ability to execute can produce better average risk-adjusted returns. They then seek to optimize the risk/reward mix of the entire portfolio of insurance and investment risks that they hold. There are two aspects of this optimization process. First is the identification of the opportunities of the insurer in terms of expected return for the amount of risk. The second aspect is the interdependence of the risks. A risk with low interdependency with other risks may produce a better portfolio result than another risk with a higher stand alone return on risk but higher interdependence.

Proposals to grow or shrink parts of the business and choices to offset or transfer different major portions of the total risk positions can be viewed in terms of risk-adjusted return. This can be done as part of a capital budgeting/strategic resource allocation exercise and can be incorporated into regular decision-making. Some firms bring this approach into consideration only for major ad hoc decisions on acquisitions or divestitures and some use it all the time.

There are several common activities that may support the macro- level risk exploitation.

Economic Capital
Economic capital (EC) flows from the Provisioning principle. EC is often calculated with a comprehensive risk model consistently for all of the actual risks of the company. Adjustments are made for the imperfect correlation of the risks. Identification of the highest-concentration risks as well as the risks with lower correlation to the highest-concentration risks is risk information that can be exploited. Insurers may find that they have an advantage when adding risks to those areas with lower correlation to their largest risks if they have the expertise to manage those risks as well as they manage their largest risks.

Risk-adjusted product pricing
Another part of the process to manage risk portfolio risk reward involves the Consideration principle. Product pricing is “risk-adjusted” using one of several methods. One such method is to look at expected profits as a percentage of EC resulting in an expected return-to-risk capital ratio. Another method reflects the cost of capital associated with the economic capital of the product as well as volatility of expected income. The cost of capital is determined as the difference between the price to obtain capital and the rate of investment earnings on capital held by the insurer. Product profit projections then will show the pure profit as well as the return for risk of the product. Risk-adjusted value added is another way of approaching risk-adjusted pricing.

Capital budgeting
The capital needed to fulfill proposed business plans is projected based on the economic capital associated with the plans. Acceptance of strategic plans includes consideration of these capital needs and the returns associated with the capital that will be used. Risk exploitation as described above is one of the ways to optimize the use of capital over the planning period. The allocation of risk capital is a key step in this process.

Risk-adjusted performance measurement (RAPM)
Financial results of business plans are measured on a risk-adjusted basis. This includes recognition of the cost of holding the economic capital that is necessary to support each business as reflected in risk-adjusted pricing as well as the risk premiums and loss reserves for multi-period risks such as credit losses or casualty coverages. This should tie directly to the expectations of risk- adjusted profits that are used for product pricing and capital budgeting. Product pricing and capital budgeting form the expectations of performance. Risk-adjusted performance measurement means actually creating a system that reports on the degree to which those expectations are or are not met.

For non-life insurers, Risk Portfolio Management involves making strategic trade-offs between insurance, credit (on reinsurance ceded) and all aspects of investment risk based on a long-term view of risk-adjusted return for all of their choices.

Insurers that do not practice Portfolio Risk Management usually fail to do so because they do not have a common measurement basis across all of their risks. The recent move of many insurers to develop economic capital models provides a powerful tool that can be used as the common risk measure for this process. Economic capital is most often the metric used to define risk in the risk/reward equation of insurers.

Some insurers choose not to develop an EC model and instead rely upon rating agency or regulatory capital formulas. The regulatory and rating agency capital formulas are by their nature broad market estimates of the risk capital of the insurer. These formulae will over-state the capital needs for some of the insurer’s activity and understate the needs for others. The insurer has the specific data about their own risks and can do a better job of assessing their risks than any outsider could ever do. In some cases, insurers took high amounts of catastrophe exposure or embedded guarantee and option risks, which were not penalized in the generic capital formulas. In the end, some insurers found that they had taken much more risk than their actual loss tolerance or capacity.

Risk Portfolio management provides insurers with the framework to take full advantage of the power of diversification in their risk selection. They will look at their insurance and investment choices based on the impact, after diversification, on their total risk/reward profile. These insurers will also react to the cycles in risk premium that exist for all of their different insurance risks and for all of their investment risks in the context of their total portfolio.

Sales of most insurance company products result in an increase in the amount of capital needed by the business due to low or negative initial profits and the need to support the new business with Economic Capital. After the year of issue, most insurance company products will show annual releases of capital both due to the earnings of the product as well as the release of supporting capital that is no longer needed due to terminations of prior coverages. The net capital needs of a business arise when growth (new sales less terminations) is high and/or profits are low and capital is released when growth is low and/or profits are high.

The definition of the capital needs for a product is the same as the definition of distributable earnings for an entire business: projected earnings less the increase in Economic Capital. The capital budgeting process will then focus on obtaining the right mix of short and long term returns for the capital that is needed for each set of business plans.

Both new and existing products can be subjected to this capital budgeting discipline. A forecast of capital usage by a new product can be developed and used as a factor in deciding which of several new products to develop. In considering new and existing products, capital budgeting may involve examining historic and projected financial returns.

Pitfalls of Risk Portfolio Management

In theory, optimization processes can be shown to produce the best results for practitioners. And for periods of time when fluctuations of experience are moderate and fall comfortably within the model parameters, continual fine tuning and higher reliance on the modeled optimization recommendations produce ever growing rewards for the expert practitioner. However, model errors and uncertainties are magnified when management relies upon the risk model to lever up the business. And at some point, the user of complex risk models will see that levering up their business seems to be a safe and profitable way to operate. When volatility shifts into a less predictable and/or higher level, the highly levered company can find it self quickly in major trouble.

Even without major deviations of experience, the Risk Portfolio Management principles can lead to major business disruptions. When an insurer makes a major change in its risk profile through an acquisition or divestiture of a large part of their business, the capital allocation of all other activities may shift drastically. Strict adherence to theory can whipsaw businesses as the insurer makes large changes in business.

Insurers need to be careful to use the risk model information to inform strategic decisions without overreliance and abdication of management judgment. Management should also push usage of risk and reward thinking throughout the organization. The one assumption that seems to cause the most trouble is correlation. The saying goes that “in a crisis, all correlations go to one”. If the justification for a major strategic decision is that correlations are far from one, management should take note of the above saying and prepare accordingly. In addition management should study the variability of correlations over time. They will find that correlations are often highly unreliable and this should have a major impact on the way that they are used in the Risk Portfolio Management process.

Mine only shows the numbers every 20 and has markers for gradations of 5. So the people who make cars think that it is sufficient accuracy to drive a car that the driver know the speed of the car within 5.
And for the sorts of things that one usually needs to do while driving, that seems fine to me. I do not recall ever even wondering what my speed is to the nearest .0001.

That is because I never need to make any decisions that require the more precise value.
What about your economic capital model? Do you make decisions that require an answer to the nearest million? Or nearest thousand, or nearest 1? How much time and effort goes into getting the accuracy that you do not use?

What causes the answer to vary from one time you run your model to another? Riskviews tries to think of the drivers of changes as volume variances and rate variances.

The volume variances are the changes you experience because the volume of risk changes. You wrote more or less business. Your asset base grew or shrunk.

Rate variances are the changes that you experience because the amount of risk per unit of activity has changed. Riskviews likes to call this the QUALITY of the risk. For many firms, one of the primary objectives of the risk management system is to control the QUANTITY of risk.

QUANTITY of risk = QUALITY of risk times VOLUME of risk.

Some of those firms seek to control quantity of risk solely by managing VOLUME. They only look at QUALITY of risk after the fact. Some firms only look at QUALITY of risk when they do their economic capital calculation. They try to manage QUALITY of risk from the modeling group. That approach to managing QUALITY of risk is doomed to failure.

That is because QUALITY of risk is a micro phenomena and needs to be managed operationally at the stage of risk acceptance. Trying to manage it as a macro phenomena results in the development of a process to counter the risks taken at the risk acceptance area with a macro risk offsetting activity. This adds a layer of unnecessary cost and also adds a considerable amount of operational risk.

Some firms have processes for managing both QUANTITY and QUALITY of risk at the micro level. At the risk acceptance stage. The firm might have tight QUALITY criteria for risk acceptance or if the firm has a broad range of acceptable risk QUALITY it might have QUANTITY of risk criteria that have been articulated as the accumulation of quantity and quality. (In fact, if they do their homework, the firms with the broad QUALITY acceptance will find that some ranges of QUALITY are much preferable to others and they can improve their return for risk taking by narrowing their QUALITY acceptance criteria.)

Once the firm has undertaken one or the other of these methods for controlling quality, then the need for detailed and complex modeling of their risks decreases drastically. They have controlled their accumulation of risks and they already know what their risk is before they do their model.